India overhauled its tax regime in 2025 with significant cuts in Goods and Services Tax (GST) rates and a higher income tax exemption threshold, with attention now shifting to customs duty rationalisation and procedural simplification in the forthcoming Budget.

From April 1 next year, the new simplified Income Tax Act, 2025, will come into force, replacing the more than six-decade-old Income Tax Act, 1961. In addition, two new laws—one providing for an additional excise duty on cigarettes and another levying a cess on pan masala over and above GST—will be implemented on dates to be notified by the government.

The tax reforms introduced in 2025 were aimed at stimulating demand amid a challenging global economic environment. With tariff-related uncertainties affecting economic decision-making, India’s reform measures focused on strengthening domestic demand to support consumption and growth.

A key element of the reforms was the reduction of GST rates on around 375 goods and services with effect from September 22, lowering the tax burden on commonly used items and addressing long-standing concerns related to inverted duty structures. The move to compress the four-tier GST slab structure of 5, 12, 18 and 28 per cent into two principal rates of 5 and 18 per cent—while retaining a 40 per cent levy only for sin goods—marked a major step towards rationalisation and simplification of the indirect tax regime.

The GST overhaul was intended to make the system simpler and more predictable, with fewer rate slabs and reduced litigation. On the collections front, GST revenues touched a record high of Rs 2.37 lakh crore in April and averaged Rs 1.9 lakh crore during the current fiscal year. However, the sweeping rate cuts have exerted some pressure on revenues, reflected in a slowing growth rate.

GST collections slipped to a year-low of Rs 1.70 lakh crore in November, registering a modest year-on-year growth of 0.7 per cent. November was the first month to capture the full impact of the GST rate cut implemented on September 22.

On the direct tax side, the government raised the income tax exemption limit, offering relief to middle-income taxpayers and increasing disposable income in the hands of consumers. The measure was widely seen as a consumption booster, particularly for urban households, while also reinforcing voluntary compliance under the simplified tax regime.

The Budget for 2025 announced that no income tax would be payable on annual income up to Rs 12 lakh under the new income tax regime, which offers lower rates without exemptions and deductions. Under this regime, income between Rs 4-8 lakh is taxed at 5 per cent, Rs 8-12 lakh at 10 per cent, and Rs 12-16 lakh at 15 per cent. A 20 per cent rate applies to income between Rs 16-20 lakh, 25 per cent to Rs 20-24 lakh, and 30 per cent to income above Rs 24 lakh.

However, the tax cuts led to a moderation in non-corporate income tax collections between April and mid-December. Net non-corporate tax collections—covering individuals, Hindu Undivided Families and firms—rose 6.37 per cent to Rs 8.47 lakh crore between April 1 and December 17, compared with a 10.54 per cent growth in net corporate tax collections, which stood at Rs 8.17 lakh crore.

Refund issuances also slowed during the current fiscal year as the Income Tax department undertook additional scrutiny of high-value refund claims. Refunds issued declined 14 per cent year-on-year to over Rs 2.97 lakh crore, according to recent data.

With major reforms in GST and income tax largely completed, policymakers have now turned their focus to customs duty rationalisation. Finance Minister Nirmala Sitharaman has said that simplification of customs would be the government’s next major reform priority, highlighting the need to introduce income tax-like features such as faceless assessment on the customs side to improve transparency and rationalise duty rates.

The government has steadily reduced customs duties over the past two years, though rates on certain items remain above optimal levels and are expected to be brought down. “Customs is my next big cleaning-up assignment,” Sitharaman said.

In the 2025-26 Budget, the government proposed eliminating seven additional customs tariff rates on industrial goods, following the removal of seven tariffs in 2023-24, reducing the total number of tariff slabs to eight.

As India moves into the next phase of tax reforms, simplification, predictability and ease of doing business are expected to remain central to the policy agenda.

Deloitte India Partner and Indirect Tax Leader Mahesh Jaising said, “evolving trade patterns, rising compliance costs, and persistent procedural bottlenecks signal the need for the next phase of Customs reforms.”

Nangia Global Partner–Indirect Tax Rahul Shekar said the emphasis should be on end-to-end digitalisation of customs processes, with uniform documentation, predictable classification practices and faster, risk-based clearances to enhance trade facilitation and investor confidence. He added that the government could consider a one-time amnesty scheme for legacy customs disputes to unlock revenue and ease the litigation burden.